Justices to weigh power of U.S. magistrates

The U.S. Supreme Court has agreed to decide whether the powers of life-tenured federal district judges can be exercised with the parties’ consent by bankruptcy judges or magistrate judges who aren’t confirmed by the Senate and don’t have life tenure.

The Supreme Court ducked that issue in June when the justices unanimously decided Executive Benefits v. Arkison and ruled there is no gap in a bankruptcy statute, thus allowing bankruptcy judges to decide state law-based cases preliminarily.

The controversy about the constitutional powers of bankruptcy judges results from a Supreme Court decision three years ago, called Stern v. Marshall, where the high court decided that a bankruptcy judge can’t issue a final ruling on a bankrupt’s state-law-based claim against a creditor. Stern prompted litigation on the question of whether the parties explicitly or by implication can give bankruptcy judges powers beyond their constitutional limits.

A case from the U.S. Court of Appeals in Chicago called Wellness International Network Ltd. v. Sharif involved issues similar to Executive Benefits. In that case, the Seventh Circuit ruled in August that the right to a decision by a life-tenured judge can’t be waived.

On Tuesday, the Supreme Court decided to hear Wellness International and decide three questions: (1) Can the powers of life-tenured judges be exercised by bankruptcy judges with the parties’ consent? (2) Can consent be implied? and (3) If the case involves a subsidiary issue of state property law, is the bankruptcy court divested of power to make final decisions?

Predicting how the court will decide a case that may be argued in December, G. Eric Brunstad Jr. in an e-mail said he foresees a ruling where “a litigant may consent to have a bankruptcy judge finally decide the case.” Brunstad, a partner at Dechert LLP in Hartford, Connecticut, argued the winning side of Stern in the Supreme Court. He also teaches law at the New York University School of Law.

The outcome of Wellness International may affect federal magistrates more than bankruptcy judges. Magistrates, who aren’t life appointed, assume much of the workload of district judges. They are allowed by statute to conduct trials or make final decisions, if the parties consent. If the Supreme Court says there can be no consent, then the workload of district judges will increase.

Implied consent is a strategically important issue. If consent can’t be implied, then a party in litigation can avoid raising the issue until the last minute, thus potentially disrupting proceedings and forcing a transfer to a district judge.

Or, a litigant could wait until the bankruptcy judge or magistrate judge makes a decision. If it’s unfavorable, the question of constitutional power could be raised for the first time on appeal if waiver can’t be implied by silence.

For discussion of the Supreme Court’s Executive Benefits decision, click here for the June 10 Bloomberg bankruptcy report. For discussion of the Wellness International decision in the Court of Appeals, click here for the Aug. 23, 2013, Bloomberg bankruptcy report.

The case in the high court is Wellness International Network Ltd. v. Sharif, 13-935. The case in the appeals court was Wellness International Network Ltd. v. Sharif, 12-01349, U.S. Court of Appeals for the Seventh Circuit (Chicago).